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Monday, December 8, 2014

Monday Morning 'Money Still Matters' Round Up

As part of my effort to start blogging more regularly again, I plan to post every Monday morning a round-up of articles that remind us money and monetary policy still matter. This is is the first installment.

The Jekyll and Hyde Monetary Views of the BIS. Ambrose Evans-Pritchard directs us to a recent BIS report that is concerned about what a Fed tightening cycle will do to the global economy. This is the same BIS that only a few months ago argued that the Fed's monetary policy was too loose and should be tightened. Yes, this is puzzling. Here is Evans-Pritchard summarizing the recent report:

Off-shore lending in US dollars has soared to $9 trillion and poses a growing risk to both emerging markets and the world's financial stability, the Bank for International Settlements has warned. The Swiss-based global watchdog said dollar loans to Chinese banks and companies are rising at annual rate of 47pc. They have jumped to $1.1 trillion from almost nothing five years ago. Cross-border dollar credit has ballooned to $456bn in Brazil, and $381bn in Mexico. External debt has reached $715bn in Russia, mostly in dollars... BIS officials are worried that tightening by the US Federal Reserve will transmit a credit shock through East Asia and the emerging world, both by raising the cost of borrowing and by pushing up the dollar.

"The appreciation of the dollar against the backdrop of divergent monetary policies may, if persistent, have a profound impact on the global economy. A continued depreciation of the domestic currency against the dollar could reduce the creditworthiness of many firms, potentially inducing a tightening of financial conditions," it said...

So the strengthening dollar and related tightening of Fed policy could trigger problems for the global economy. Maybe, then, we should be less concerned about "currency wars". That leads us to the next piece.

It's the Domestic Demand Stupid! Ramesh Ponnuru reminds us why worrying about "currency wars" is misguided when economies are depressed. It completely misses the point:

Some practical people these days are fretting about "competitive devaluation" or "currency wars." The concern is that countries are engaged in a zero-sum game of devaluing their currencies to boost their net exports. This game can't help the world as a whole because the net exports of all countries have to add up to zero (excluding any trade with space colonies). "For every winner, there's a loser," writes Alen Mattich in the Wall Street Journal, though he allows that this may be true only in the short term...The economist Barry Eichengreen has been challenging this historical understanding for decades. He summarized his case in 2009: "In the 1930s, it is true, with one country after another depreciating its currency, no one ended up gaining competitiveness relative to anyone else. And no country succeeded in exporting its way out of the depression, since there was no one to sell additional exports to. But this was not what mattered. What mattered was that one country after another moved to loosen monetary policy because it no longer had to worry about defending the exchange rate. And this monetary stimulus, felt worldwide, was probably the single most important factor initiating and sustaining economic recovery." Eichengreen was still at it in 2013, calling fear of currency wars "the meme that will not die."

In the depressed conditions of recent years, expansionary monetary policies that cause currencies to devalue seem to have helped both the countries that undertook them and other countries. The International Monetary Fund concluded that the "spillover effects" of the first round of quantitative easing in the U.S. were positive. If the Federal Reserve had followed a monetary policy as tight as the European Central Bank's, our economy would be performing as poorly as the euro area -- and Europe wouldn't be better off for our joining its misery.

So it is not the depreciation that matters, but the boost to domestic demand from easing monetary policy. Unfortunately, not every central bank is interested in stabilizing domestic demand as noted next.

Monetary Policy Differences Explain a Lot. Martin Wolf looks across the global economy and finds a common factor behind the variation in economic growth: the stance of monetary policy.

Monetary policy provides the best key to understanding the variegated global picture. The central banks of the US, UK and Japan all adopted easier policies and were rewarded with an upturn. Given weak wage growth and a lack of fiscal support, such stimulus ought to continue.

Europe is an unhappy exception. Despite German misgivings, low interest rates are no evidence that money is too loose: nominal GDP growth stutters along at less than 3 per cent, a clear sign that the stance is much too tight. In recent years the ECB twice made the mistake of raising rates too soon, and thereby punished Europe with a deeper recession and a worse fiscal crisis. If its president Mario Draghi cannot ease policy further, the consequences will be just as serious.

He is sounding a lot like Scott Sumner here. Speaking of Scott, he had a recent post speaking to the question of why has not nominal GDP targeting swept the economics profession.

The Nominal GDP Targeting Glass is Half Full. This post was in response to a series of questions posed by Brad DeLong:

I'm not sure NGDP targeting has not "swept the economics community," at least in a sort of "glass half full" sense. Let's start with the initial position of market monetarists (MMs). I think I was pretty typical of my fellow MMs in not being very well known...Thus given the initial starting position of MM, I think endorsements of NGDP targeting by the likes of Woodford, Christy Romer, Jeffrey Frankel, and some other top people is pretty good. And of course there's Brad DeLong, who clearly is in the elite group, especially in the intersection of macro/macro history/history of thought. Then there are also lots of prominent economists in the "it's worth a shot" category, including (AFAIK) Paul Krugman. When I speak to various people at conferences and after talks, I find lots of people who tell me privately that they are on board. But they don't necessarily announce it in the New York Times, (as Romer did). So given our humble beginnings, I do see a lot of progress.

I would add that in my view I'm not even at the 50% mark in terms of my effectiveness. The NGDP futures market has been slow to materialize, but it will happen in 2015. Recent discussion with various think tanks has suggested to me that there is still a lot of interest in the NGDP targeting idea, and people are looking for ways to help. Hopefully these discussions will lead to something soon. And note that it's the conservative/libertarian think tanks that invite me---I see that as being really important, given that the names I mentioned above are all at least slightly left of center. Here's a question to think about:

Is there any monetary policy proposal other than NGDP targeting that has substantial support in the Keynesian, monetarist and Austrian communities?

Let's also not forgot that NGDP targeting was fashionable in the 1980s. Many top academics endorsed it back then. It fell by the way side once inflation targeting took off in the 1990s. Market monetarists have been trying to return NGDP targeting to its previous glory. Our work is still cut out for us, but like Scott I am optimistic. The glass is half full.

Free Banking and the Fiscal Theory of the Price Level. Last week I appeared on Boom-Bust with Erin Ade and had a great time discussing free banking, the fiscal theory of the price level, Abenomics, and some other issues. Our conversation starts at about 13 minutes into the video: